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Friday, 24 August 2012

Malaysia leaves Singapore trailing in Islamic finance business

Singapore is struggling to make inroads into Islamic finance even as neighbouring Malaysia is on the cusp of another record-busting year.

Bankers say Singapore is hobbled by a lack of a domestic market for Islamic finance products, while Middle East investors are still US dollar-based and conservative.

The situation appeared to be improving when Malaysian sovereign wealth fund Khazanah in 2010 sold S$1.5 billion sukuks or Islamic bonds here, and Sabana, the world's largest Syariah-compliant real estate investment trust (Reit), raised S$664 million through its initial public offer.

Since then, the Islamic finance landscape here has been rather barren. The Republic appears to be missing out on one of the fastest-growing financial markets, with Islamic finance growing at an estimated 15-20 per cent per annum.

Islamic banking assets with commercial banks globally will hit US$1.1 trillion (S$1.38 trillion) in 2012, up a third from US$826 billion in 2010, according to figures from the 2011 Ernst & Young World Islamic Banking Competitiveness Report.

The government has played a role in promoting Islamic finance. In June, the Monetary Authority of Singapore (MAS) hosted the third annual World Islamic Banking Conference, Asia Summit, the third time it has done so.

MAS also set up the Islamic bond programme in 2009 and its wholly owned unit issued S$105 million sukuks and S$80 million sukuks for the financial years ended March 31, 2011 and 2012 respectively.

"MAS's main focus is to create a conducive environment for the sustainable growth of the Islamic financial services industry," said an MAS spokeswoman.

She noted developments in the capital market and fund management space in recent years, such as sukuk issuances to finance wakaf development, a corporate sukuk programme by a property developer, the world's first Syariah-compliant Data Centre Fund and Sabana Reit.

"The good response to these offerings indicates that there is demand for quality Syariah-compliant products," she said.

Singapore may be a vibrant financial centre with over 700 financial institutions, including a growing cluster of Islamic banks from the Middle East and strong trade flows with the six-member Gulf Cooperation Council (GCC) countries, but it loses out to Malaysia's large home-grown market.

The GCC, which is Singapore's sixth-largest trading partner, consists of Saudi Arabia, Kuwait, Bahrain, Qatar, Oman and the United Arab Emirates. Last year, bilateral trade flows between Singapore and the GCC grew over 40 per cent to S$62 billion.

Rafe Haneef, chief executive of HSBC Amanah Malaysia Bhd and managing director of Global Markets Amanah, said Malaysia has a large volume of Islamic investors looking for Syariah-compliant investments like sukuk compared to the Singapore market.

"Along with Islamic investors, Malaysia has a large number of Muslim- owned companies, most of which are looking for Syariah-compliant financing and sukuk issuance. Again, there is not a high demand for such financing in the Singapore corporate environment," said Mr Haneef.

Malaysia accounts for 60 per cent of global sukuk deals.

Mr Haneef said the global sukuk market was expected to expand to US$44 billion this year. For the first half of 2012, the global sukuk market was US$20.5 billion, up from US$15 billion a year earlier.

Another problem for Singapore is that conservative Middle Eastern investors tend to invest only in familiar companies and prefer to make those investments in US dollars.

Mohd Ismail Hussein, Maybank Singapore's head of Islamic banking, said the expected demand from Middle East investors did not materialise because of economic and liquidity issues at home.

Another factor was "their preference for rated, USD debt issuance with good yields, which are scarce here", he said.

Still, this hasn't stopped bankers here from trying to venture into the business.

Sim Buck Khim, OCBC Bank's co-head of capital markets, said the challenges impeding the development of Islamic finance in Singapore are multi-faceted.

"We believe one of the key reasons is that conventional banking is more readily available and easier to tap at the moment. The additional 'cost' - in terms of time and education for Islamic products - may also be seen as another factor that hampers its appeal to issuers as well as borrowers in general," he said.

"With continual efforts by banks and other stakeholders such as central banks, rating agencies and law firms to raise awareness, market receptiveness will grow, and consequently we may see more issuance in the future."

"This year, we've had one or two non-deal roadshows," said Clifford Lee, DBS head of fixed income, on bringing investors and issuers together.

"We continue to engage GCC investors on how we can best make ourselves relevant," he added.

DBS is the market leader in the SGD bond market and handled Khazanah's S$1.5 billion sukuk deal in 2010.

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